IRA Excess Contributions from A to Z

Learning Objectives

Define an excess contributionIdentify excess contribution correction methodsCalculate NIA to an excess contributionList the possible taxes and penalty taxes for excess contributions

2

Excess Contributions

TrueExcess

Deemed Excess

Types of Excess Contributions

3

True ExcessTraditional IRA Roth IRA

• Contribution exceeds individual limit

• Contribution exceeds earned income

• Contribution for age 70½ year or later

• Contribution exceeds individual limit

• Contribution exceeds earned income

• IRA owner exceeds modified adjusted gross income (MAGI) limit

4

2018 MAGI Limits for Regular Roth IRA Contributions

Filing Status MAGI for Full Contribution

MAGI for Partial Contribution

Ineligible for Roth Contribution

Single Up to $120,000 $120,000 up to $135,000 Over $135,000

Married, filing jointly Up to $189,000 $189,000 up to $199,000 Over $199,000

Married, filing separately N/A $0 up to $10,000 Over $10,000

5

Deemed Excess• Eligible current-year contribution• IRA owner removes eligible amount with NIA by deadline• Cannot deem as excess after tax return due date, plus extensions

6

True Versus Deemed Excess

I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. I was told by my tax advisor that I didn’t have enough compensation. I would like to remove the extra $3,000. What type of excess is this?

TRUE EXCESS

DEEMED EXCESS

7

True Versus Deemed Excess

I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What type of excess is this?

TRUE EXCESS

DEEMED EXCESS

8

1/1 12/31

Contribution year

4/15 10/15

Deadline to recharacterize or

remove an excess if tax return

is filed on time

Deadline to recharacterize or

remove an excessif tax return is not filed

on time

Deadline to Correct an Excess Contribution

9

Deadline to Correct an Excess Contribution

I made a mistake when I made my $5,500 Roth IRA contribution on May 12, 2017. What is my deadline to remove the excess contribution?

October 15, 2018

10

Deadline to Correct an Excess Contribution

I made a mistake when I made my $6,500 Traditional IRA contribution on May 25, 2018. I would like to withdraw it. What is the deadline to remove the contribution?

October 15, 2019

11

BEFORE

• Recharacterize (if eligible) with NIAor

• Remove any contribution with NIA

Is the contribution a true excess?

YES

• Carry forward (i.e., redesignate)or

• Remove excess contribution

AFTER

NO

• Remains an annual contribution (deductible or nondeductible)

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IRA

Excess Contribution

Earnings NIA

Correcting Excess Contributions Before the Deadline

13

Contribution x Total EarningsAdjusted Opening Balance

NIA =

• Calculated on IRA containing excess contribution

• Distributed from that IRA• Based on overall value of all

investments in IRA

NIA Calculation

14

Contribution x Total EarningsAdjusted Opening BalanceNIA =

Adjusted Opening Balance

Adjusted Closing Balance

Any penalty

15

NIA Exercise

7Page

16

Beginning Balance

Contributions during

computation period

+ Adjusted Opening Balance

=

$41,758.21 $5,500+ $47,258.21=

17

Ending Balance

Distributions during

computation period

+ Adjusted Closing Balance

=

$47,437.72 $0+ $47,437.72=

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$47,437.72 - $179.51=$47,258.21 $0-

Adjusted Closing Balance

- Total Earnings=

Adjusted Opening Balance

Any Penalty-

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$3,000 x$11.39 = $179.51$47,258.21

Contribution xNIA = Total Earnings

Adjusted Opening Balance

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Excess Correction Before Deadline• Remove excess contribution• Remove NIA• Do not claim excess as deductible or nondeductible

contribution on tax return• Claim NIA as taxable income in year excess was made• NIA may be subject to 10% early distribution penalty tax

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Box 1 = Gross distribution amount, includes excess contribution plus NIA

3011.39

22

3011.39

Box 2a = NIA only

11.39

23

3011.39

11.39

Box 7 = Code 8 or P with code 1 or J as requiredMark the IRA/SEP/SIMPLE box for Traditional IRA

24

Current-year contribution

2017 2018

Code P (Use code 1, 4, or J when applicable)

Contribution removed by 10/15

25

Prior-year contribution

Current-year contribution

Contribution removed

2017 2018

2017 2018

Contribution removed by 10/15

Code 8 (Use code 1, 4, or J when applicable)

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Reporting Excess Contributions Removed Before the Deadline

Page 11

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6522.18REDLINE FINANCIAL29 PATH PLAZAJERSEY CITY, NJ 07306

99-8888888 999-88-9999

ARTHUR GROSSMAN

14627 SYLVAN ST.

VAN NUYS, CA 91411

22.18

8 X

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Excess Correction After Deadline

Correct Only True Excess

• Carry forward (i.e., redesignate)

• Remove

Contribution Year Following Year

Tax return due date

4/15

For calendar-year filer who timely files, no later

than six months after the tax return due date

10/15

29

BEFORE

• Recharacterize (if eligible) with NIAor

• Remove any contribution with NIA

Is the contribution a true excess?

YES

• Carry forward (i.e., redesignate)or

• Remove excess contribution

AFTER

NO

• Remains an annual contribution (deductible or nondeductible)

30

31

Pay 6% penalty tax

Leave contribution in IRA

Leave NIA in IRA

IRA owner carries forward on tax return

Reported on Form 5498 for year made for

Carry Forward (i.e., redesignate)

2015$22,000 contribution

=$5,500 eligible contribution

and$16,500 excess contribution

(6% penalty on $16,500)

2016$16,500 carried forward

=$5,500 eligible contribution

and$11,000 excess contribution

(6% penalty on $11,000)

2017$11,000 carried forward

=$5,500 eligible contribution

and$5,500 excess contribution

(6% penalty on $5,500)

2018$5,500 carried forward

=$5,500 eligible contribution

and$0 excess contribution

(no 6% penalty)

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Excess Contribution After DeadlineContributions less than or equal to

annual limitContributions greater than

annual limit

• Remove excess• Leave NIA• Pay 6% penalty tax

• Remove excess (taxable)• Leave NIA• Pay 6% penalty tax• Pay 10% penalty tax

(if applicable)

33

Excess contribution

IRA

IRA owner may withdraw without tax or penalty tax

Invalid rolloverEmployer-sponsoredretirement plan

34

Box 1 = Enter the total distribution amount

35

Box 2a = Leave blank

36

Box 2b = Check the Taxable amount not determined box

37

Box 7 = Traditional IRA: Code 1 or 7Roth IRA: Code T, Q, or J

38

Questions?

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IRA Excess Contributions from A to Z

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